A fair deal for the small investor

Dan David, co-founder of the financial information website GeoInvesting, is not a man to beat about the bush when it comes to corporate fraud.

The company - based in the rural American town of Skippack, about 50 kilometres northwest of Philadelphia - has made a name for itself by uncovering a steady stream of lies and deceit practised by US-listed Chinese firms.

Enthusiastic about the long-term growth of these firms, 43-year-old David initially doubted some of the stories that were being circulated. So much so that the company initially started researching US-listed China stocks in August 2010 to refute the evidence of short sellers such as Muddy Waters Research and Alfredlittle.com. But GeoInvesting's research showed that fraud was rampant and being done on a massive scale, David said. The short sellers were correct.

Reluctantly, David's firm also began short selling to unmask the fraudsters and help clear out and clean up the market for smaller investors. Some of the more notable exposures included chicken breeder Yuhe International, Lotus Pharmaceuticals and Puda Coal.

Yuhe claimed to have bought 13 breeder farms, which turned out to be false. Lotus said it spent US$32.7 million on land in Inner Mongolia which GeoInvesting had independently appraised at under US$7 million. In February, the US Securities and Exchange Commission referred to a GeoInvesting report when it alleged that Puda Coal chairman Zhao Ming effectively looted the company and left shareholders with nothing.

But David isn't just angry about the fraud - he also has strong views about the investment banks and bigger research houses involved. The lack of due diligence is no accident because it would compromise the big fees they stand to make. And combined with a perceived lack of co-operation between the Chinese and US governments, the smaller investor is getting less than a fair deal.